More PSU bank mergers in offing? RBI bats for further consolidation

the Reserve of Bank of India has suggested further consolidation in the banking sector as larger banks are more labour cost efficient as they reap economies of scale.

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RBI suggests further consolidation in the banking sector

After the recent merger of Bank of Baroda with Vijaya Bank and Dena Bank, the Reserve of Bank of India has suggested further consolidation in the banking sector as larger banks are more labour cost efficient.

RBI researchers also noted that the overall labour cost efficiency across the banking sector in India hasn’t improved during 2005-2018 because of the acute risk aversion during 2011-2016 — a period characterised by severe stress in the banking sector.

“Our results point to larger banks being labour cost efficient relative to their smaller counterparts as the former can reap the benefits of economies of scale,” RBI said in the research paper.

“This finding provides an additional rationale for recent mergers of banks, both amongst PSBs and PVBs (Private Banks) and suggests that further avenues of consolidation in the banking sphere may be explored,” it further added.

The number of large banks were 39 and 42 in 2005 and 2018, respectively; while the same for small banks was 37 and 42. In all the years, large banks were found to be more efficient than small banks. Among large banks, PSU banks initially had the most number of banks with efficiency score of 1. However, after 2009, foreign banks had the largest number of banks on the efficiency frontier, the RBI report noted.

Notably, Finance Minister Arun Jaitley has time and again advocated for consolidation in the public sector banks to make them globally competitive and more efficient. In the Narendra Modi-regime, two big mergers took place in the banking space including State Bank of India’s merger with its five associates and Bharatiya Mahila Bank.

“I think India needs fewer and mega banks which are strong because in every sense, from borrowing rates to optimum utilisation, the economies of scale as far as the banking sector is concerned are of great help,” Arun Jaitley had said in February.

According to finance ministry sources, after the announcement of Bank of Baroda’s merger with Vijaya and Dena Bank the government had serious plans to go for another merger, but the plans got shelved after th eBJP was defeated in the assembly elections in Madhya Pradesh, Chhattisgarh and Rajasthan.

“After the defeat in Madhya Pradesh, Chhattisgarh and Rajasthan, the government decided not to proceed with further merger and consolidation in the public sector banks as that could harm them in Lok Sabha polls,” a finance ministry source told Financial Express Online requesting anonymity.

Meanwhile, the research paper also said that the PSU banks are more labour efficient than their private sector peers, because of deceleration in employment growth and also cost cutting measures through innovative techniques.

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